A construction company's commercial general liability insurance policy does not provide coverage for faulty workmanship or subcontractor negligence, says an appeals court, in upholding a lower court ruling.

Little Rock, Arkansas-based J-McDaniel Construction Co. Inc. purchased a CGL policy from a unit of the Great American Insurance Group, in 2005, according to Monday's ruling by the 8th U.S. Circuit Court of Appeals in St. Louis in J-McDaniel Construction Co. Inc. v. Mid-Continental Casualty Co. et al.

The policy provided coverage for “property damage” caused by an “occurrence,” which was defined in the policy as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The policy also included an endorsement excluding coverage for damage arising from subcontractor's work, according to the ruling.

In 2006, David and Susan Conrad sued J-McDaniel for defects in their home's construction that allegedly resulted from subcontractors' faulty workmanship. The suit was ultimately settled for an undisclosed amount.

Mid-Continent refused to defend or indemnity J-McDaniel for the settlement, the ruling said. While the insurer agreed that the home's defects constituted property damage, it argued the damage did not arise from an occurrence as defined by the policy, according to the ruling.

J-McDaniel sued Mid-Continent, claiming breach of contract, among other claims, arguing that faulty workmanship is an occurrence within the policy's meaning. The federal District Court in Little Rock dismissed the claim, stating that under a 2008 Arkansas Supreme Court ruling in Essex Insurance Co. v. Holder defective workmanship is not an occurrence as defined in a similar CGL policy.

J-McDaniel appealed the ruling, arguing in part that while under the Essex ruling, at the time the suit was filed, the CGL policy did not cover faulty workmanship, “the legal landscape is shifting, and that states are trending toward faulting workmanship within CGL policy coverage.” It said the Arkansas Supreme Court would reverse Essex if presented with the issue today.

A three-judge appellate panel unanimously upheld the lower court ruling, however. “We have no authority to speculate as to how (the Arkansas Supreme Court) would rule if presented with the question again,” said the ruling.

“We are not at liberty to disregard the binding law of the state, nor may we substitute our judgment for that of the Arkansas Supreme Court,” said the panel, in affirming the lower court ruling.

Last year, the 6th U.S. Circuit Court of Appeals in Cincinnati held that a subcontractor's allegedly faulty preparation of a building pad, which resulted in subsequent settling and structural damage to the building constructed on top of it, was not an occurrence within the standard coverage language of a CGL policy.